At an unscheduled meeting in Vienna, the OPECcartel reduced its petroleum production quota by 1.5 million barrels per day. The market, which was expecting a more substantial step, reacted with the fall, not rise, of oil prices. On Friday, Russian Urals oil has already dropped to $58.60 per barrel. The world financial crisis has not sidestepped the Persian Gulf either. Kuwait and Saudi Arabia have had to take measures to support their banking systems.

At the OPEC session held Friday in Vienna, the decision was made to cut oil production by 1.5 million barrels per day beginning November 1. The last time the production quota was cut, by 500,000 barrels per day, was in December 2006. In June of this year, the price of OPEC oil was over $140 per barrel, and on Friday it dropped to $59.70, the lowest level since March 2007. The OPEC countries, including Iraq, deliver 31 million barrels of oil, that is, 40 percent of the world supply, to the market every day. “There is an excess of crude oil on the market,” observed Algerian Energy Minister Chakib Khelil, who chaired the session. “Commercial reserves of oil in industrially developed countries have even grown recently. Mikhail Krutikhin of Rus-Energy told Kommersant that the OPEC decision “means nothing formally or for the market. It simply acknowledges falling demand.”

The market expected a reduced OPEC quota, but suggestions about how much the cartel would lower its quota ranged from 1 million to 2.5 million barrels per day. “The market knew about the coming quota reduction,” said Troika Dialog’s Valery Nesterov, “and it was calculated into the price of oil contracts.” A representative of the London commodities exchange told Reuters that the possibility of OPEC reducing production by 2 million barrels per day was figured into oil prices a week ago. On Friday morning, oil prices went up in expectation of the OPEC decision, but prices fell immediately after the decision was announced. Brent went from $67.30 to $62.50 per barrel and its price reached $61 in the course of the day, the lowest point since March 21, 2007. The price of Urals on Friday dropped to $58.60 per barrel. “The market reacted crazily to the OPEC decision,” Russian Energy Minister Sergey Shmatko summarized. “The market is behaving illogically and it is difficult to tell what it will do next year.”

David Fife, chief analyst of the International Energy Agency, said that “We are still worried about oil reserves with the approach of the winter quarter,” and he expressed hope that the production cut did not exacerbate the instability of the world economy. German Minister of Economics Michael Glos issued a statement saying, “I appeal to responsibility and reason among oil producing countries to not burden the global economy with an additional price inflating policy.”

OPEC representatives have said repeatedly that they consider a price of $70-90 “fair.” The state budgets of Venezuela, Iran, Indonesia and Libya are calculated to balance with an oil price of no less than $70 per barrel. The same is true of Russia. Finance Minister Alexey Kudrin stated yesterday that the Russian budget will remain without deficit as long as oil prices stay above $70 per barrel. The reduction of prices for Urals to $50-60 per barrel means a reduction export by approximately $10 billion per month. Last Wednesday, Russian President Dmitry Medvedev said at a meeting with OPEC Secretary General Abdullah al-Badri that Russia “is interested in supporting stable prices for oil,” but Russia has even fewer means of influencing world oil prices than OPEC does. “We are developing the technology to form an oil reserve,” Shmatko has stated. That reserve will enable Russia to raise or lower its production is a short period of time, “but that is a medium-term/long-term forecast,” Shmatko admitted.

Until last Friday, the estimates of most investment banks of the average price for the year for oil for 2009 were in the range of $70-80 per barrel. But now the forecasts have been reconsidered. Nesterov said of Friday’s events that “It shows OPEC has lost control of the market to a significant degree.” He suggests that oil prices may fall to $60 per barrel. Deutsche Bank analyst Michael Lewis said, “We believe this week will mark the start of a new quota reduction cycle by OPEC and it will continue through 2009. However, we believe production cuts will not rescue the oil price. We target WTI crude oil prices hitting $50 a barrel next year.”

It is likely that OPEC will make its next decision to cut production quotas before its scheduled meeting in Algiers in December. “We must take a pragmatic position. If decisions have to be made, they will be made, and we don’t have to wait for the session, Khelil said.

Economic problems in the oil-producing countries themselves, especially those on the Persian Gulf, may influence OPEC decisions. On Saturday, the finance ministers of the Persian Gulf countries held a meeting in Saudi Arabia devoted to the situation in banking in that country and Kuwait. The Kuwaiti government provided aid the Gulf Bank, the fifth largest bank in the country, on Friday. The National Bank of Kuwait has announced that it is facing losses of hundreds of millions of dollars and banks throughout the region can expect lower stability due to falling real estate prices on the Persian Gulf. Falling oil prices adds to the uncertainty. Reducing production will reduce the resources of Saudi Arabia, Bahrain and Kuwait, which they may need to combat the financial crisis.